Thursday 30 September 2010 13.57 EDT
First published on Thursday 30 September 2010 13.57 EDT

Ireland nationalised its second-largest bank today and pumped billions of euros into the rest of its beleaguered financial sector, just a day after mass street protests in Dublin against public spending cuts to pay for the bank bailouts.

Allied Irish became the fourth bank to be nationalised by the Fianna Fáil-led government while the publicly owned Anglo Irish Bank, the country's largest, was told it needed at least another €7bn (£6bn) of taxpayer funds to stay afloat.

Irish finance minister Brian Lenihan described the new costs as "horrendous" and said his plan to find a further €3bn in a budget due in December would now have to be "upped". It will be the country's fourth budget in just over two years.

The Irish bailout plans were announced as Spain was told its credit rating was to be cut and Portugal wrestled with an escalating interest bill on its debts. However, Lenihan said the new bailout figures drew a line under the crisis and ended the "nightmare" of the last 18 months.

He said: "We're quite satisfied that the balance sheets of the banks have been cleaned up and restored and the banks are ready and fit to go back into business."

The Irish central bank, which has sought to calm fears that the country may need to call on the EU rescue fund, said the cost of bailing out Anglo Irish, the lender at the centre of Ireland's financial crisis, could rise from €23bn to €34bn under a worst-case scenario. The total bill for rescuing the country's banks and building societies is expected to be €45bn.

Lenihan said that taxpayers needed to pump extra funds into Anglo and Allied to prevent a collapse that could take the country with it.

"Any Anglo failure would bring down the sovereign," he warned. "It is systemically important, not because of any intrinsic merit in the bank – I can assure [you] I don't see any. But because of its size relative to the national balance sheet. No country could contemplate the failure of such an institution."

Like Greece and Spain, Ireland has resisted calls to reschedule or default on its debts. Lenihan admitted such action would cut interest payments but said it would harm the country's standing among international investors, and its ability to raise cash in the future.

The bailout will take government debt to almost 100% of GDP, but ministers insist it will be manageable because repayment will be spread over at least a decade.

Although the costs of the bank rescue will increase the Irish deficit to 32% of national income, Lenihan insisted the huge injection of cash was a one-off.

But several analysts echoed comments by the Irish Labour party's spokesperson on finance, Joan Burton, who described the soaring cost of shoring up Anglo as "Ireland's Black Thursday". She led a vote against an extension of a bank guarantee, despite warnings from Lenihan and the central bank governor that the banks needed it to continue trading.

One analyst said Ireland was "not out of the woods yet" and could still face a higher bailout bill next year.

House prices have continued to fall in Ireland which, like Spain, has tens of thousands of homes lying empty. Analysts fear that falling property prices and high unemployment will increase bad debts and repossessions, leading to even higher debt charges against the banks.

The decision to transfer billions to the banks is deeply resented in Ireland. The depth of antipathy was evident in Dublin yesterday when a cement mixer was driven into the gates of the country's parliament. The vehicle was plastered with references to Anglo Irish Bank and bankruptcy. The bailout is the equivalent of €10,000 for every Irish citizen.

It emerged that two of Allied Irish's leading executives have been forced out after the government took control. Chairman Dan O'Connor will quit within weeks while managing director, Colm Doherty, will leave before the end of the year after 13 months in the job.

Elsewhere in Europe, credit rating agency Moody's downgraded Spain because of concerns over its weak growth prospects and considerable deterioration in the government's financial strength.

The other two main rating agencies, S&P and Fitch, had already downgraded Spanish government debt in the spring.